Saturday, December 23, 2017

MBL Infrastructure Ltd: Will bidding by Promoters Trigger an Open Offer?
CMP: Rs.27.10
Photo: Slideshare
The Shares of MBL Infrastructure Ltd has been buzzing since the last few days. It hit the upper circuit limit of 5% on Thursday after the Economic Times reported that the firm could become India’s first roadbuilder to achieve a successful insolvency resolution on about Rs.1,700 crore of outstanding loans. The news assumes significance, from the point that the Lakhotias (promoters) have built the company from a scratch and mere two bad years have put a spanner in their efforts. 

According that report the promoter Anjanee Kumar Lakhotia had agreed to infuse in about Rs.120 crore into the business which is nearly five times more than the capital he had promised initially. The repayment period on the loans is also proposed to be reduced to about 9.5 years from 12, the ET reported. 

“Creditors seemed receptive about the revised resolution plan, and they have gone back to their respective boards for management approvals,” sources told ET.

A consortium of about 15 lenders, including State Bank of India and RBL Bank, is likely to take a final decision very soon as regards settlement of their dues.

Moreover, after the resignation of Anjanee Kumar Lakhotia from the post of CMD, the Speculation is rife, of a new management take-over from the ruins of the earlier one.

It is pertinent to mention here that, this week the Kolkata bench of NCLT in an order ruled that the promoter of MBL Infrastructure Ltd is eligible to bid for the company.  The order clears confusion regarding the position of non-defaulting promoters, as per new ordinance passed by the NDA Government.

Photo: Dynamic Levels
The court in its ruling said: "Merely because there is a default by a borrower in repayment of borrowed amount to a creditor does not render the borrower or its guarantor, dishonest. Every act of default cannot be equated with malfeasance".

The ET had reported on November 22 that MBL could be the first road-builder to achieve a successful insolvency resolution. The company had outstanding loans worth Rs.1,700 crore that it owed to 15 banks, including the SBI and RBL Bank. 

The verdict came after the company filed an application seeking the bench to clarify whether the promoter of MBL Infrastructure Ltd, was still qualified to bid under the provisions of the newly promulgated ordinance.

The Business Standard wrote on 23 December, 2017:
The Kolkata bench of the National Company Law Appellate Tribunal issued an interim order stating that the final resolution plan for MBL Infrastructure would not be approved till it made its final ruling.

The NCLT had ruled that the Ordinance barring promoters of companies whose debts were overdue by a year from bidding for these companies in insolvency proceedings could not be applicable to all promoters. It observed that the guarantor whose guarantee had not been invoked could not be clubbed with those prohibited from bidding.

The NCLT ruled that the Ordinance about the Insolvency and Bankruptcy Code (IBC) did not bar every promoter and guarantor from bidding for insolvent companies.

The order will have repercussions on ongoing cases where promoters and guarantors have bid for companies undergoing insolvency resolution. The promoters of Essar Steel and Bhushan Steel have shown an interest in bidding for their companies.

Lakhotia’s resolution plan for MBL Infrastructure was found to be in compliance with the rules under the IBC by the resolution professional. However, the government had by then amended the IBC through an Ordinance barring promoters of companies with non-performing assets of more than one year, wilful and dubious defaulters or those associated with them from bidding for the insolvent companies.

After the Ordinance, the committee of creditors found that Lakhotia was not eligible to bid for MBL Infrastructure.

Lakhotia contended the decision by the committee did not reflect the correct interpretation of the Ordinance. He said he could not be barred from bidding as one year had not lapsed from the date MBL Infrastructure’s dues were declared NPAs. He also said that the creditors did not invoke the guarantee executed by him nor was any demand made by the lenders to make any payments as a guarantor.

Members of the committee of committee were not clear about the implications of various clauses of the Ordinance and sought an interpretation by the appellate tribunal in this case. 

However, it remains to be seen, whether, the promoters bidding for their own company triggers an open offer or not. Open offer is aimed at providing the shareholders an exit option, as there may be a management change post-acquisition and investors may perceive potential risks in the business. According to a SEBI circular, a change in management, can call for an open offer, provided it satisfies certain criterion.  Let us examine a few Salient Points:  Triggers for an Open offer:

The company according to my sources in Delhi and Kolkata, is expected to go full throttle, to execute its humongous order book; once fine tuning with the lenders is consummated and the working capital bottleneck gets ironed out. 

The Business Standard wrote on 21 December, 2017:
For the road sector, which has plausibly looked up in recent times, the Governments infra development focus including the Bharatmala project announcement is nothing short of a booster shot, according to IIFL Wealth Management.

A whopping Rs.6.9 trillion project outlay spanning FY18-22 includes Bharatmala Phase I of 24,800 kms, existing NHDP program of 10,000 kms and road development of 48,877 kms under other schemes.

Post the announcement, NHAI has revised its FY18 road award target from 6,500 km to 10,000 kms and its project pipeline is worth more than Rs.50,000 crore of projects, bids for which must be submitted by January 2018.  The project pipeline by NHAI is driven by high ticket size projects which would mean around 50% rise in value of projects in FY18 even if awarding on km basis stood nearly flat yoy.

Although project implementation would be critical given past challenges like Land acquisition, the gigantic outlay is a massive business opportunity for developers in this space with average annual road awarding of more than 16,000 kms.

Therefore, the risk taking investors can buy and hold the shares of MBL Infrastructure Ltd (Rs.27.10) for a target of Rs.110-plus in one or two years. If you remember, I have been recommending the stock from Rs.23.50-24 levels. 

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